Many Canadians use car loans to help them finance a vehicle purchase. However, before you start searching for a car, you should get pre-approved for a car loan so you’ll know how much you can afford before you start visiting dealers.
Let’s go into more detail about car loan pre-approvals and how they can benefit you.
Key Points
- Car loan pre-approval is what lenders tentatively offer based on your financial and credit profile.
- Car loan pre-approval includes an estimated loan amount, interest rate, and loan term, giving you a good idea of what you may qualify for.
- Since loan pre-approvals often involve hard credit checks, they may cause a temporary yet minor dip in your credit score.
What Is A Car Loan Pre-Approval?
A car loan pre-approval involves the lender conducting a comprehensive review of your loan eligibility based on your financial health and credit score. The lender will use this information to offer you a specific loan amount and interest rate. Essentially, a pre-approval gives you an idea of how much you can afford based on a preliminary look at your financial situation, which includes factors such as your income and current debt load.
| Note: A car loan pre-approval does not guarantee approval. If your finances or credit score change, or too much time has passed since you were offered pre-approval, you may no longer qualify for the loan terms offered. Similarly, you must still formally apply for the loan, which may include providing further information and documentation. |
Does Car Loan Pre-Approval Affect My Credit?
A pre-approval may have an impact on your credit score, as it often involves a ‘hard credit inquiry’. However, in some cases, it may only be a soft credit check, which has no impact on your credit score.
Pre-Qualification Vs. Pre-Approval For An Auto Loan
Car loan ‘pre-qualification’ and ‘pre-approval’ both sound like pretty much the same thing, but they’re slightly different. It’s important to understand how these concepts differ, especially as they pertain to your chances of getting a car loan approval.
| Pre-Qualification | Pre-Approval | |
| How it Works | The lender provides you with an estimate of how much you could qualify for based on basic eligibility criteria. | The lender will tell you what you’re likely to get approved for prior to a more comprehensive review of your finances and credit. |
| How It Affects Credit | No effect | Possible negative effect |
| Are You Guaranteed Approval? | No | No |
A car loan pre-qualification means the lender has conducted a basic review of your finances and creditworthiness to determine if you’re likely to qualify for a car loan. Based on the information you provide, the lender will offer you an estimate of the loan amount and interest rate you may be eligible for. You can use a pre-qualification calculator online to get an estimate of what you may be able to qualify for.
On the other hand, a car loan pre-approval is a more in-depth evaluation than a pre-qualification. The offered rate and term are what you’ll get with a pre-approval, that is, if your finances check out. Keep in mind that pre-approvals only last a short time — around 30 to 60 days. After this time elapses, the pre-approval may no longer apply.
How To Get Pre-Approved For An Auto Loan
Being pre-approved for a car loan will give you an advantage when shopping for a car and looking for financing to cover this big purchase. To get pre-approved, follow these steps:
Step 1. Check Your Credit Score
You should know what your credit score is before you apply for any type of loan. This will give you an idea of your chances of getting pre-approved for a loan. You can check your credit score for free using Loans Canada’s CompareHub.
In general, a credit score of 660 and up can help you secure a car loan, that too with affordable rates. If you have bad credit, you should work on improving your credit scores to maximize your chances of loan approval at a low interest rate.
That said, your credit score is just one factor involved in determining your pre-approval. So, you may need a higher score if other factors, such as your income or debt, are negative. Or, you may even be able to get away with a lower score if your income is strong relative to your current debt. This all depends on the lender.
Step 2. Gather Required Documents
When applying for a car loan pre-approval, the lender will require various information regarding your financial situation, including:
- Proof of income: This shows the lender that your earnings are enough to cover your loan payments.
- Job details: A stable job that you’ve been at for a long time gives the lender more reassurance that you’ll be steadily employed over the long haul.
- Rent/Mortgage: Payments dedicated to paying your rent or mortgage will eat into your income. The lender will likely want to know how much income is left over after paying these bills to ensure you have enough to cover your car loan payments.
- Debts: Like your rent or mortgage payments, there are other monthly bills to pay. The lender will want to make sure that you have enough money to make your car payments after all other bills have been paid.
By having all this information ready to hand in, you can expedite the pre-approval process.
Step 3. Get A Pre-Approval
After completing the application, you’ll usually get a response within 24 hours, and sometimes instantly.
Armed with a pre-approval letter from your lender, you can head to the car dealer to find a vehicle that fits your budget. Pre-approval helps you determine the most you can spend on a vehicle purchase, so you can narrow down your options based on what you can afford.
Once you find a car you want to buy, you can complete the loan application with the lender, and the final loan process will be carried out.
What Happens After You Get Pre-Approved For A Car Loan?
Once pre-approved for a car loan, you only have a certain amount of time— typically between 30 to 60 days, as mentioned — to finalize a deal. Otherwise, the pre-approval will expire, and you’ll need to repeat the process to get pre-approved again.
However, if something changes with your income, employment, or credit score, you may still need to go through the pre-approval process again, even if the expiration date hasn’t passed yet. That’s because your pre-approval is based on the original information provided. If any of these factors change, it may affect your ability to get approved, or may affect your loan amount or interest rate.
Even though there’s a timeline for the pre-approval, you shouldn’t feel pressured to buy a vehicle immediately. Instead, take the time to find something that makes sense for you and your budget.
What Happens If I’m Denied A Loan After Pre-Approval?
There are several reasons why your lender may still turn you down for a car loan even after you’ve been pre-approved, and most have to do with changes to your income, employment status, debt, and credit score.
Here are a few examples that could prompt your lender to deny your loan application after pre-approval:
- You switched jobs
- Your income is lower than what you said
- You applied for other loans or credit products and added to your debt pile
- Your credit score fell
- You work in an industry that could be affected by the current political climate
Any changes like these could impact your eligibility to get approved for a car loan and will require the lender to reassess your finances and creditworthiness.
What Are the Benefits Of Pre-Approved Car Loans?
There are several perks to getting pre-approved for a car loan before you start shopping, including the following:
Shop Within Your Budget
Knowing how much you can spend on a car based on what your lender has pre-approved you for will help you focus on vehicles that fit within your price range. This will save you time and disappointment from looking at cars that are out of your budget.
Get A Lower Interest Rate
You can negotiate with the dealer to give you a lower interest rate on their in-house financing compared to what’s on your pre-approval letter. For instance, if your pre-approval rate is 10%, you might bargain with the dealer to offer you 7%. Even if they come back with a slightly higher rate of 9%, you’ve still managed to score a slightly better deal.
Keep in mind that you should look at the details. If the dealer offers you a lower interest rate but a longer loan term, you’ll likely pay more in the long run. That’s because longer loan terms typically mean more interest paid, while shorter loan terms may help you save money in interest.
Avoid Spending More
With an upper limit written on paper, your pre-approval will help you avoid spending more than you can afford. Without knowing how much you can realistically get approved for, you could be vulnerable to upsells from the dealer without giving the final price much thought. With a pre-approval, you can avoid committing to a price you can’t comfortably cover.
Speed Up Final Approval
Getting pre-approved for a car loan can speed up the final loan approval process. In this case, the lender has already assessed your financial information, and an agreement has already been tentatively reached for a loan of a specific amount. This makes the final approval quicker, as there’s little verification left to do.
How To Shop For A Car After Pre-Approval
Once you’ve been pre-approved for a car loan, you can shop with more confidence. After you’ve been pre-approved for a car loan, follow these steps to shop for a vehicle:
Step 1. Set Your Budget
Use the loan limit on your pre-approval letter to guide you when you shop. That way, you can focus only on vehicles that fit within your budget. It should be noted that you don’t have to use the full amount of the pre-approval. In fact, it’s recommended that you stay well under this threshold.
Step 2. Research Different Vehicles
Start your search for a vehicle online. Many car dealers have comprehensive websites that list all the vehicles they have in their fleet, along with all the specs and prices. This makes it easier to narrow down your options before checking out the vehicles in person and taking them for a test drive. If you’re so inclined, you may be able to buy your car completely online.
Step 3. Check Vehicle History
If you’re buying a used car, be sure to get the vehicle history report to check for any prior accidents, title issues, ownership records, or maintenance records. Even if you’re buying new, it’s a good idea to research the average maintenance costs of the vehicle model you’re buying.
Step 4. Negotiate The Price
Use your pre-approval letter as leverage to boost your negotiating power and try to get a better price or score additional perks, such as an extended warranty or a lower financing rate.
Step 5. Finalize The Loan Agreement
Once you’ve decided on a vehicle to buy, the final car loan approval process can be carried out. At this point, you and the lender can iron out all the details of the loan, including the rate and term. Provide any required documents, and carefully review the loan terms before signing.
When Should I Apply For Car Loan Pre-Approval?
Consider the following scenarios to determine when to apply for loan pre-approval:
You Want To Know How Much You Can Afford
You may have an idea of how much you can realistically spend on a car based on your income and current debt load. But a loan pre-approval will give you a more precise figure to work with.
This will help make car shopping more efficient. You’ll save time and disappointment by sticking to a specific price range.
You’ve Never Applied For A Loan Before
If you’re new to the world of lending, getting pre-approved for a car loan can help you get familiar with the type of loan you can get approved for without committing.
You Want More Negotiating Power
As mentioned, having a pre-approval letter in hand when shopping for a car can put you in a stronger bargaining position. This could potentially help you negotiate a lower price and interest rate from the car dealers’ financing team to keep your purchase as affordable as possible.
You’re Ready To Make A Deal
Pre-approvals don’t last forever. They typically expire within 30 to 60 days, so you need to make a deal before that time lapses. As such, getting pre-approved is best if you’re ready to make a purchase and work out a deal for a loan.
Final Thoughts
There are plenty of perks that come with car loan pre-approval. You can get a clear idea of how much you can afford, and can speed up the final loan approval process, among other things. Before you start searching for your next vehicle, consider getting pre-approved for a car loan first.
